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Stock prices finished mixed last week, with the Dow up 1% and the Nasdaq down the same amount. A big drop in
AppleAAPL -1.5351744876157316%Apple Inc.U.S.: NasdaqUSD124.43
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40410221AFTER HOURSUSD124.57
0.1399999999999860.11251305955155509%
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16.657295850066934Market Cap
736073426681.742
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1.5108896568351684% Rev. per Employee
2153110More quote details and news »AAPLinYour ValueYour ChangeShort position
(ticker: AAPL) shares took a bite out of tech stocks. As has been the case since the elections, market attention is focused almost exclusively on...that's right, the fiscal cliff.

U.S. stocks in part were supported by a strong rally in Chinese stocks last week and the lack of bad news from Europe. The Dow Jones Industrial Average rose 130 points, or 1%, to finish at 13,155.13, while the Standard and Poor's 500 index added two points, or 0.1%, to 1418.07. But the tech-laden Nasdaq Composite fell 32 points, or 1%, to 2978.04.

Of late, Apple's stock chart has shown alarmingly normal behavior, that is, shares going down as well as up. Last week it fell 9% to 533.25.

"Apple's a victim of its own success," notes Todd Schoenberger, a managing partner at LandColt Capital. Up about 75% earlier this year, it has been a "capital gains machine" in 2012, so accountants are telling money managers to take those gains at this year's lower tax rates while they can. There's that fiscal cliff again.

To paraphrase Howie Mandel, adds Peter Boockvar, an equity strategist at Miller Tabak, the market's focus on the fiscal cliff right now can be distilled into "deal or no deal?" It will celebrate a deal and cry on no deal, but the arguably more important contents of the deal won't be a worry until 2013, he says.

Schoenberger thinks the market's traditionally good showing in December might not occur this year because of the concentration on Washington, D.C. Short of the unlikely event of a deal in coming days, "there will be no Santa Claus rally this year," he predicts.

Economic data that might otherwise have moved the market were relegated to the back burner last week. The Labor Department said on Friday that the November unemployment rate fell 0.2 percentage points, to 7.7%, thanks mainly to a 350,000 drop in the labor force. Consumer-confidence numbers released Friday were weaker than expected.

AS AMPLY NOTED in the financial press, special dividends have come fast and furious this year, and they've intensified in recent weeks. According to Markit Securities Finance, the fourth quarter has seen 159 special-dividend announcements, an all-time high. Most arrived after the elections.

Corporations are rushing to beat the Dec. 31 deadline, the fiscal cliff, when the Bush-era capital-gains and dividend-tax rates are scheduled to expire—if there's no action by Congress and the administration. Without action, dividend taxes can soar from 15% to as much as 43.4%, with an Obamacare surcharge, for investors at the highest income level.

The prospect of higher taxes has some investors worried about next year's market return, says Christian Thwaites, CEO of Sentinel Investments. But the two aren't necessarily connected, he adds.

For example, for an investor with $250,000 in taxable income, the tax-cut expiration could raise taxes about 13% next year. With the after-tax dividend yield of the Standard & Poor's 500 index now about 1.89%, if taxes went up the additional 13%, the net dividend yield would fall to roughly 1.64%. In order for the S&P 500 index price to get back to a 1.89% net yield, it would have to correct to about 1232. Yields and stock prices move inversely.

That would be a scary 13% or so drop in the stock market, he notes, but this admittedly crude measure doesn't take into account that dividends are expected to rise about 11% next year. So, the consensus projection of the 2013 S&P 500 dividend yield is high enough that it effectively cancels out the tax-hike reduction, he adds. "What's the big deal here?" Thwaites asks.

Moreover, adds Matthew D. McCormick, a portfolio manager at Bahl & Gaynor, "People buy dividend-yielding stocks for income and downside protection, not tax avoidance." This strategy doesn't go away when taxes go up, and arguably—if higher taxes cause market volatility—then the demand for dividend payers would be more acute, he opines. Roughly half of all household-owned equities are held in tax-deferred accounts, so today's tax rate is not a big factor to them, he adds.

If history is any guide, the stock-market return and taxes don't seem strongly correlated. The nearby chart reveals a fact many investors probably aren't familiar with: Some of the highest average annual stock-market returns came in decades when taxes were higher than they are today. Conversely, the worst stock-market returns occurred during the era of the Bush tax reductions and low dividends, the first decade of the 21st century. Most investors are familiar with that.

We like lower taxes as much as the next guy, but if investors are worried that higher dividend and capital-gains taxes by themselves imply a poor stock-market return next year, history doesn't agree.

AFTER SHARES OFPenn National GamingPENN 2.2193211488250655%Penn National Gaming Inc.U.S.: NasdaqUSD15.66
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155587More quote details and news »PENNinYour ValueYour ChangeShort position
(PENN) soared by one-third on its announced transformation into a real-estate investment trust, we understand that the U.S. Post Office, which owns mailboxes around the country, and Greece, with its beautiful islands, are both considering turning into REITs in order to save big-time on taxes.

We're kidding, of course, but Penn shares jumped on the idea that it will return more to shareholders because REITs pay substantially less in taxes. In a nutshell, Penn, which runs 29 casinos and racetracks, will turn into two companies, a "PropCo," which will own the properties, and a gambling-operations company, or "OpCo," which will lease the properties. For those who are unfamiliar with REITs, they pay little in taxes as long as they distribute nearly all—typically over 90%—of their income to shareholders.

UBS' REIT analyst, Russ Nussbaum, is skeptical. The flaws to structures like the one Penn is proposing, he writes in a recent report, are that the PropCo's fate rests on just two factors: the health of the OpCo, here a gambling operation, and the ability of the PropCo to diversify its revenue.

In general for REITs, the fewer the tenants, the higher the stock discount to peers. The best REITs have huge tenant bases that give them stable revenue. One tenant doesn't do that. The PropCo will have to diversify its rental base, and that's going to cost money.

"We cannot overstate the risk that this lack of revenue diversification poses to the REIT," Nussbaum writes, "which in turn supports our view that REITs with large tenant concentrations should trade at a heavily discounted valuation."

He adds, "We can't help but wonder if the OpCo-PropCo restructurings are simply shortsighted attempts to increase stock prices via arbitraging current real-estate [values] versus equities valuations, rather than long-term strategies to enhance shareholder value." His report also points out that such structures have a mixed history.

Not only does Penn's REIT have just one tenant, but it's a heavily regulated one, with gambling operations subject to multiple regional and national regulators. It's not clear how the regulators will react to this change or how long the approvals will take.

Moreover, casinos are not shopping centers or apartment buildings. They need more frequent and costly refurbishments to keep up with rivals adding better attractions, slots, and sprucing-up rooms every few years. And shopping center REITs don't have to worry about keeping their gambling licenses.

While it is true that the PropCo will be free to do property-sale/leaseback deals with any casino it wants, that potential growth is going to take time and money, and it's untested territory.

The day before the announcement, Penn was 37.61, and now it's nearly 49.47, although the firm's assets are exactly the same. In fairness to the company, some insiders were buying the stock at the higher levels, presumably because they believe in the plan.

Under the REIT set up, earnings that accrue to shareholders will probably be greater in aggregate, but they will come through financial engineering not fundamental improvements. That expected PropCo expansion might or might not prove possible. After one year, the effect of the tax savings on comparable earnings growth will disappear and Penn will remain the same casino company that has posted up-and-down results over the past five years.

It's not like more gamblers will be rushing to Penn casino joints because it's a REIT. Penn's share price discounts a lot of good things happening over the next 12 months. It won't take much of a disappointment to dunk the stock.